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Cyprus Would Do Better to Leave the Euro

NEW YORK ( TheStreet) -- Cyprus would be better off to leave the euro than accept the terms of the bailout imposed by the European Union, International Monetary Fund and European Central Bank.

Until recently, Cyprus was a prosperous island economy thriving through strong tourism, shipping and maritime related activities and a significant international financial sector.

Its major banks have branches in Russia, the Ukraine, UK and other overseas locations and have attracted large offshore deposits. Cyprus has gained great popularity as a portal for western investment into Russia, Central and Eastern Europe, China and India.

Much like New York City, London and other big-city European banks, the Cypriot banking sector attracted deposits much larger than it could productively use lending in its local economy and invested in other financial instruments -- Cypriot banks invested heavily in Greek sovereign debt.

The 2012 Greek government bailout engineered by the European Union, International Monetary Fund and European Central Bank imposed losses greater than 50% on foreign bondholders -- among those, Cypriot banks. Hence, the Troika, which is now imposing severe conditions in exchange for aid to bailout Cypriot banks, bears substantial responsibility for the present sad state of their balance sheets.

During the recent U.S. financial crisis, the FDIC was adequate to restructure and secure deposits at smaller banks; however, the Federal Reserve printed hundreds of billions of dollars to purchase and work out souring bonds held by larger banks and the Treasury borrowed similar sums to inject new capital into those banks. More importantly, depositors -- large or small -- did not lose any money during or after the U.S. crisis.

The European Central Bank lacks the tools to participate in such bank workouts, and the European Union lacks the borrowing authority of the U.S. Treasury -- and the taxing powers to back up bonds. Hence, banks in Cyprus, just like those in Ireland and Spain in their banking crisis, lack a lender of last resort to keep them afloat while they restructure and work off losses through new, sounder business activities.